Expanding market stirs up water business competition

When a young investor of Indian origin decided to start a water bottling company called Rwenzori Beverages, his own family reportedly laughed off his request for a loan to kick-start his business. The banks were apparently not any understanding either, with many of them asking who would buy merely “packaged water” in a country where one could easily go to any home and ask for it.

Nonetheless, Mahmood Somani persisted with his dream and managed to get it off the ground in 1993. With a unique marketing strategy that turned drinking bottled “mineral water” into a status symbol, the company quickly grew in leaps and bounds. By the time Somani cashed in his chips in early 2010, selling the company to beer giant SABMiller, he reaped a reported $18 million.

If imitation is the sincerest form of flattery, then the entry of at least two dozen companies into the water bottling business within a little over 15 years after the launch of Rwenzori provided a crucial pointer to the continuously growing market for bottled water not just in Uganda but across at least five neighbouring countries.

The five countries are Tanzania, Rwanda, Burundi, South Sudan and the Democratic Republic of Congo, with some companies saying DR Congo could in the near-future become an even bigger market than South Sudan currently is. As local and foreign markets grow, one of the latest entrants into the water bottling sector is Vero Foods Ltd.

The new company is owned by local investors led by Emmanuel Katongole, who is more renowned as one of the brains behind ARV manufacturing firm Quality Chemicals.

So what would draw an investor like Katongole into what already seems like a crowded sector?

Mr Katongole was not around to respond to that question, as he was reportedly out of the country. However, the General Manager of Vero Foods Ltd, Robert Ssemakula, said the studies they had carried out returned positive information. “We analysed the market and the players who were in the market when we entered did not have the capacity to satisfy the growing demand for water,” he said.

Vero Foods Ltd launched their products on May 6 this year and, according to Mr Ssemakula, their sales have steadily tripled with every passing month since then. The company introduced a 0.3 litre bottle, which is now the smallest and most handy bottle in the Ugandan market, to create an altogether new market segment.

In total, 27 water bottling companies had been certified by the Uganda National Bureau of Standards (UNBS) by the end of September 2011. The UNBS Quality Assurance Manager, Gyaviira Musoke, also told Prosper that the standards body is currently processing the certification applications of another 10 companies.

The influx of water bottling companies on the Uganda market has however brought with it a series of attendant challenges, mainly stemming from the stiffer competition. Chief executives of some of the leading water bottling companies complained that due to the intensity of competition, some firms were engaging in unscrupulous practices.

During an interview at his company headquarters in Namanve, the managing director of Rwenzori Bottling Company, Kirowi Suma, for instance argued that some of the companies were flooding the market with sub-standard products.

“If you have people who are not adhering to the standards, definitely they bring in water which is not up to the standards,” he explained. “The water produced below the standards is sold cheaply and people will usually go for the cheap water without knowing about the quality and the hygiene.”

Mr Suma, who doubles as the vice chairman of the Uganda Water Bottling Companies Association, wondered whether UNBS has the requisite capacity to monitor the operations of all players in the sector.
UNBS official Musoke however said in a separate interview that the water sector is one of those that the standards body is confident it is monitoring well.

He showed Prosper a set of standard requirements that each water bottling company must fulfill periodically in order to receive and maintain its certification licence.

In addition, according to Mr Musoke, all companies must carry out microbiological and chemical analysis of their water at least twice a month in UNBS laboratories as an additional measure to ensure the safety of the water.

Mr Musoke however identified a policy that he said some of the companies alleged to have employed unscrupulous methods could be using to gain an unfair advantage over their competition. “Somebody is free to package water from National Water and Sewerage Corporation into bottled drinking water but the issue is that you must bring that out clearly,” he said.

“The standard gives the companies the leeway to choose the type of water they package and they must name their product accordingly. Now, whether the society appreciates that or not is another issue altogether.”

As a result of this policy, there are two types of bottled water on the Ugandan market; natural mineral water which is sourced from underground and purified drinking water that can simply be sourced from NWSC.
Because the cost of pumping natural mineral water from the ground and purifying it costs more than accessing water from NWSC which is then purified for drinking water, Mr Musoke says the cost of the former should be higher in an ideal market. Uganda’s market, however, is far from that.

“When you look at our economy, we do not differentiate some of these things so the pricing is the same,” said Mr Musoke. “In an organised market, the price of natural mineral water should be a little higher than that of ordinary packaged drinking water because the process undertaken to maintain sterility and its natural status requires a lot of care.”

But uneven competition, according to Mr Kirowi, comes in many different forms. Describing it as the “biggest challenge” that the companies face, Mr Kirowi said, “If you find people who are able to sell water below the cost of producing it, then you ask yourself, ‘how do they manage to do that?’”

Among the factors that the executives say account for the uneven competition are tax evasion by some of the companies through under-declaring costs of production and raw material imports, tax breaks given by the government to some of the companies that give them an unfair advantage over their competitors, failure to pay employees fair salaries, and electricity theft.

One of the chief executives who spoke to Prosper now fears that the major lasting effect result of the uneven competition is the emergence of a price that could cripple the entire water bottling sector.

“This industry is locked in a permanent price war but it is also locked in a most silly war that any businessman can be,” said Mr Ssemakula. “There are very few mineral water companies making a profit because they are undercutting themselves on price. Anybody who is selling a bottle of water at less than Shs500 at the factory price is making a loss.

The break-even price for mineral water is above Shs500, depending on your market so when you find somebody selling a carton of water (12 bottles) at less than Shs12,000, they [must be] making a loss.”

Asked whether some of the companies whose water costs less than the industry price had found a way to minimise costs, Mr Ssemakula argued that it was unlikely since the majority of the production costs goes to purchasing packaging materials – something none of the companies has control over since they all import plastic.

“The biggest cost for mineral water, 80 per cent of the cost, is packaging. Out of the Shs500 that we sell, over Shs400 is just cost of the packaging; the bottle, the cap and the label,” he said. “Plastic bottles are made out of PET plastic, a petroleum product which is imported from petroleum producing countries. We totally have no control of the price of this plastic because of the fluctuating dollar rate.”

Despite the price war, Mr Ssemakula believes the high cost of the dollar is likely to result in a high price hike of bottled water by the end of 2011.

He said, “I can confidently tell you that prices of mineral water are going to go up. I can tell you that by next year, all mineral water of 500 milliliters will cost Shs1000 per bottle [because] there is going to be another price increase around December.”

According to Mr Ssemakula, it is only the price war has been keeping the prices of bottled water down despite the high inflation and foreign exchange rates. He said their counterparts in Kenya have already raised their prices.

With the price competition resulting in a “depression” of prices at a time when the costs of production are rising, Mr Kirowi of Rwenzori believes the situation could soon bring some of the companies to their knees if little is done to level the playing field.

“If the government is not going to look into the problem of an influx of non-taxpayers, I see this industry going down the drain because, if you have got too many people who are producing water and not paying taxes, those who are paying taxes will say the ground is not levelled so it is better to close the door and do something else,” said Mr Kirowi.

Shaken by some of their own projections, the water bottling companies recently organised a meeting through their association with the Trade Minister, Amelia Kyambadde, to seek solutions to their problems.